It pays to protect your business and that means understanding the value of your business and its
assets, and insuring them properly. Accurate valuations of assets ensure the correct sums insured thereby avoiding the risk of underinsurance and co-insurance clause triggering should a loss event occur, or conversely, unnecessary over Insurance costs.
At ONRISK Consultancy Namibia we have the technical knowledge, skills and experience to provide expert advice in all areas of property and contents valuations for all your insurance requirements including:
- Replacement With New
- Reinstatement
- Indemnity Value
- Loss Adjustment
Unfortunately most businesses have only 50-75 percent of the correct replacement value insured. The risks of under-insurance can affect more than just the business. Ultimately it is the Directors of a company who bear responsibility for declaring insured values, and they can be penalized for misrepresentation in the event of a claim.
THE RISKS OF GETTING IT WRONG
Businesses usually run into problems when they need a quick claim process, and it transpires that there is no solid basis for the declared insurance values. In this case, ensuing investigations by the insurer can lead to a protracted claims process and delayed settlements which can take months or even years.
If the property and business is underinsured, even if unintentionally, the insurer may decide that the underinsurance is deliberate and refuse to pay the claim at all. This is an extreme case, but it can happen. On the other hand, if the insurer does decide to pay, despite the underinsurance, the payout will not cover the full loss and the business will need to make up the shortfall.
Neither situation is ideal, particularly when a business is trying to get up and running quickly after a loss.
THE IMPORTANCE OF HAVING THE CORRECT REINSTATEMENT COST FOR YOUR BUSINESS ASSETS
When the unexpected happens, businesses rely on insurance cover to make good their losses and allow them to start working again as soon as possible. The majority of businesses have property insurance to cover their buildings, plant & equipment and contents typically held through an insurance policy. In the event of a claim, having a correct and updated Reinstatement Cost report can greatly simplify and streamline the claim process.
What many businesses don’t understand is that unless their business assets have been valued correctly, they are more than likely to be underinsured, without even knowing it. Even more concerning is that many businesses will have based their insurance cover on the advice of an insurance broker, or relied on the advice of a trusted employee who may have been responsible for their insurance needs for years.
In this case, business owners may well think their business is covered, when the reality is that with the best intentions, their broker or employee may have left the business exposed to significant risk.
NO.1 TRAP: SELF-ASSESSMENT OFTEN LEADS TO UNDERINSURANCE
Insurance is designed to restore a business to the position it was in before the loss and to reinstate the business on a like-for-like basis without financial penalty.
Without a formal Updated Reinstatement Cost Report, the likelihood is that insured values may be based on incorrect advice and false assumptions which can lead to two major problems:
- The sums insured are incorrect
- Initially incorrect sums insured are then reviewed annually by staff who often fail to account for the real rise in the cost of reinstatement.
These costs can include professional fees, changes to building codes, debris removal, site improvements and currency fluctuations, as well as lead times for approvals, planning, rebuild period and policy life.
OTHER COMMON PRACTICES THAT CAN LEAD TO INCORRECT SUMS INSURED
- Not updating sums insured
- Simply adding 5-10 percent to last year’s figures
- Basing increases on real estate conditions
- Asking a bank, builder, or real estate agent for the valuation
- Relying on advice from an in-house accountant
- Referring to building guides
- Adopting book value
- Using financial valuation reports and deducting land value
- Adopting the second-hand purchase price or acquisition price of an asset
- Overlooking or not taking into account the real costs of installation and commissioning
CASE STUDY: THE REALITY OF UNDERINSURANCE
Many people think that underinsurance would only impact them in the event of a total loss, where they would not receive the full value of their loss and would need to fund the shortfall. In fact this is not true. In the event of a loss even if you suffer a partial loss you can be penalized for under-insurance.
Example 1: A Partial Loss Claim
A building is insured for N$4 million and a fire causes N$2 million of damage. You might think that you would be fine – the building is insured for N$4 million and you only require N$2 million to make good, right?
Wrong. The loss adjuster will want to know how you came up with insured values and as well as a thorough evaluation of what was in the area of loss. Without a proper Reinstatement Cost Report, you will be unable to answer these questions to his satisfaction, and he will make his own assessment. If his assessment shows that you were under-insured by 50%, you may only receive 50% of the cost of the loss. That means N$1 million to replace losses of N$2 million. You will be left to fund the remaining N$1 million, even though you thought you were adequately insured. This is often referred to in insurance policy wording as co-insurance clause or co-insurance triggering.
The same principle applies in the case of a total loss.
THE BENEFITS OF GETTING IT RIGHT
It is not difficult to ensure that you are properly insured. The key is to make sure that this is done by a qualified professional with significant experience in providing you with an accurate Reinstatement Cost for insurance purposes. An accurate update removes the risk to your business and to your Directors of underinsurance, and ensures that there will be no gap in the event of a claim.
It is also important to have an up-to-date asset register which will allow you to respond to a loss with the minimum impact to your business. In fact, one of the advantages of the Reinstatement Cost Report process is that it forces many businesses to implement internal processes, such as asset registers, that have long been on the to-do list or are outdated.
The benefits of having a professional Reinstatement Cost Report carried out are significant, both to you and your business, and include:
- Not paying the consequences of underinsurance in the event of a claim
- Not paying excessive premiums due to over insurance
- More negotiating power when it comes to renewals
- Fast-tracked claims process without disputes around the insured values
- Minimized interruption to business operations
- Established lead times for business interruption calculations
- Implementation of internal processes, such as asset registers
- Compliance for risk mitigation
WHAT SHOULD YOU DO TO ENSURE YOUR BUSINESS IS CORRECTLY INSURED?
It is absolutely crucial to have your business and its assets insured correctly.
ENGINEERING SURVEYS
Engineering Inspections are essential when it comes to having your or your clients’ assets adequately insured, as such damages can be very costly and disruptive. Not having a suitable insurance cover for such events can harm you or your business. That is why we, together with our experienced and knowledgeable engineering professionals, can provide expert advice and unbiased opinions regarding any problem or failure relating to the structural, mechanical, or electrical integrity of your residential, commercial, or industrial property.
Our assessments help identify the early stages of an occurring problem which could lead to possible major failures. In the instance of a risk occurring, our Engineering Department can, with pre-inspections, provide an accurate valuation of the client’s assets and provide guidance on the necessary sum insured beforehand. This avoids under-insurance or co-insurance, or conversely, unnecessary over-insurance costs for the clients. We also assist in determining the reinstatement cost with post-inspections and can recommend the necessary like-for-like reinstatement. Our services can benefit not only the clients, but also insurance companies, as we can reduce disputes around the insured values, which will subsequently speed up the overall claim process. With our assessments, we can advise the client on necessary alterations to reduce risks, which will in turn also reduce the amount of insurance claims.
